Zendesk IPO Underscores Momentum in Cloud CRM

A recent report released by Markets and Markets estimates the global cloud computing spend to grow to $121.1 billion by 2015, recording a compounded annual growth rate of 26% over the period 2010 through 2015.  Another report by Market Research Media expects strong growth within cloud computing to continue. The report projects a 30% annual growth rate over the five year period from 2015 with the market expected to be worth $270 billion by 2020.

Zendesk’s Financials
An IDC research report estimates the global customer relationship management (CRM) software market at $20.7 billion in 2012 of which the customer service and contact center segments accounted for $10.2 billion. Analysts believe that over the period 2012 through 2017, growth in CRM will be driven by SaaS-based solutions which will report ten times the growth than legacy on-premise solutions. Cloud-based help desk support and ticketing application services provider Zendesk is counting on that growth.

Zendesk offers a SaaS-based customer service platform that helps organizations connect with their end customers to drive improved customer engagement. Their platform offers customer support through multiple channels ranging from self-service options to email, chat, voice, social media, and websites. The platform also consolidates data from customer interactions to provide organizations with meaningful analytics for performance benchmarking.

They have a customer base of more than 40,000 organizations across 140 countries. They cater to these customers in more than 40 languages. Their platform’s strong capabilities have helped them deliver strong revenue growth. Zendesk reported revenues of $72.0 million last year, recording an 88% growth over the year. Customers outside the US accounted for 41% of their revenues. But, like several other SaaS players, revenue growth has yet to turn into profits. Zendesk reported losses of $24.4 million in 2012 which narrowed marginally to $22.6 million in 2013.

Till recently, Zendesk was venture funded with $85 million in funding from investors including Christoph Janz, Charles River Ventures, Benchmark, Matrix Partners, Redpoint Ventures, GGV Capital, Goldman Sachs, and Index Ventures. Last month, they went public and raised $100 million by selling 11.1 million shares at $9.00 each. They listed on the NYSE under the ticker ZEN. Zendesk plans to use these funds for acquisitions.

Zendesk’s Acquisition
Before they went public, Zendesk announced the acquisition of Zopim Technologies, a privately held software development firm that offers SaaS-based live chat service for an estimated $30 million. Singapore-based Zopim is a leading provider of live chat software that provides free and paid for live chat plans. Their widget is being used by more than 120,000 websites across 140 countries. Zopim had reported revenues of $1.4 million in 2012 with a net income of $289,000. Zendesk already has their live chat software, but they will phase it out to make way for Zopim’s solution and integrate the offering with their platform for chat-enabled agents.

Competition
The cloud-based CRM market has seen a lot of competition and consolidation. There are comparatively smaller players like Freshdesk from India, which is part of our 1M/1M portfolio and Zoho competing with Zendesk. Freshdesk now has over 10,000 customers across 180 countries and Zoho does not disclose its financials. Then, there are the giants like Salesforce, Oracle, SAP, and Microsoft also playing in the market that is estimated to grow to $36 billion by 2017. Salesforce is the leader in the market with nearly 15% market share and has access to funds with which it can help consolidate the sector. The industry has already started to see some consolidation. Back in 2011, Salesforce bought Assistly for $50 million followed by the $1.5 billion acquisition of RightNow by Oracle and in 2012, Citrix acquired New Zealand-based Beetil. The coffers that these giants have with them will make it fairly easy for them to acquire the smaller players which are already eating into their share, especially of the SMB market. In fact, SAP is, most likely, going to make an acquisition in the sector in short order. Would that be Zendesk, or a smaller player like Freshdesk?

Zendesk’s stock is trading at $15.22 with a market capitalization of $1.07 billion. It touched a high of $18.45 last week.